question archive Cruz Corporation has $100 billion of debt outstanding
Cruz Corporation has $100 billion of debt outstanding
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Cruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $450 billion. Under the Miller model, what is Cruz’s value if the federal-plus-state corporate tax rate is 28%, the effective personal tax rate on stock is 17%, and the personal tax rate on debt is 29%? Enter your answer in billions. For example, an answer of $1.23 billion should be entered as 1.23, not 1,230,000,000. Round your answer to two decimal places.
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Answer :
Given Value of All equity or Unlevered firm= $450 billion
Value of levered firm = Value of All equity or Unlevered firm + {Debt Value * [1- (1-corporate tax rate) * (1-Personal Tax rate ) ]/ (1-Personal Tax rate on Debt)}
= 450 + {100 * [1- (1-0.28) * (1-0.17)] / (1-0.29)}
= $465.83 billion
